Guilty verdicts in Capital + Merchant Finance fraud trials

Two former
directors and the Chief Executive of failed finance company,
Capital + Merchant Finance Limited (Capital + Merchant),
were found guilty in the Auckland High Court today on fraud
charges brought by the Serious Fraud Office (SFO).

Four charges had been laid against Mr Nicholls and
Mr Tallentire, and three charges against Mr Douglas, in an
investigation relating to transactions involving
approximately $28 million that occurred between 2004 and
2006. It was alleged that these transactions (collectively
known as the Clyde 1 & 2 and Numeria 1 & 2 transactions)
were entered into in breach of the restrictions contained in
the company’s trust deed, and resulted in trusts
controlled by the accused receiving benefits totalling
approximately $15.9 million.

All defendants were found
guilty in respect of the charges relating to Clyde 1 & 2,
and Nicholls and Douglas were also found guilty in respect
of the Numeria 1 transaction.

Tallentire was found not
guilty in respect of Numeria 1 & 2, and Nicholls and Douglas
were found not guilty in respect of Numeria 2.

Mr Nicholls
and Mr Douglas, also jointly faced charges each under the
Crimes Act of theft by person in special relationship and
jointly one charge of false statement by promoter.

These
charges related to the non-disclosure of alleged related
party lending totalling approximately $14.4 million, to a
Palmerston North development known as ‘The Hub
Properties’.

Both were found not guilty on these
charges.

SFO Chief Executive, Mr Adam Feeley said that
while the collapse of Capital + Merchant had not received
the same attention as some other failed finance companies,
the two investigations into its affairs had been one of
SFO's highest priorities.

“Thousands of New
Zealanders’ lives were irrevocably changed for the worse
from the collapse of Capital + Merchant. Its failure was as
bad as anything which occurred in the industry, with $190
million invested in it by approximately 7,000 members of the
public. Nothing has been recovered for them, in contrast to
most other finance company collapses where at least some
recoveries have been made."

Mr Feeley said that the case
was one of the most important commercial fraud cases in
recent years.

“This was a hugely complicated case
involving deeply cynical transactions. The defendants used
convoluted legal structures and opaque accounting methods to
fool the public into investing for one purpose and then
using that money for other, unauthorised, purposes. The
decision makes it clear that directors will be held
accountable where they fail to act in accordance with their
obligations to investors."

The SFO's two investigations
in Capital + Merchant were conducted over a period of 16
months in total and were followed by two trials that lasted
eight weeks in total.

Mr Feeley said that the case
highlighted the complexity and scale of commercial frauds,
and the skills required to successfully conclude
them.

"This case involved of hundreds of hours of
painstaking forensic analysis and the results are a tribute
to the team that worked on it.”

SFO commenced its
investigation into the failed finance company in March 2010
following a complaint from receivers, Grant Thornton.

Mr
Feeley said that the cooperation of the receivers was an
important part of the success of the investigations and
prosecutions.

"The support of the insolvency profession is
critical to uncovering fraud, and we are grateful to the
receivers for their assistance to our investigation."

Mr
Nicholls, Mr Douglas and Mr Tallentire have been remanded in
custody for sentencing on 31 August.Note to
editors:Background to investigation
Capital + Merchant Finance Limited (Capital +
Merchant) was incorporated on 18 January 2002. It operated
as a finance company providing financial accommodation and
mortgage facilities for commercial and residential property
development. Funds for lending were sourced primarily from
the issue of securities to the public in the form of
debenture stock and convertible capital notes.Neal
Medhurst Nicholls and Wayne Leslie Douglas were the founding
directors and beneficial owners of Capital + Merchant. Owen
Francis Tallentire was appointed Chief Executive of the
company. Mr Tallentire was also later appointed a Director.
Mr Nicholls was a Director until the company was placed in
receivership in November 2007. Mr Douglas resigned as a
Director in February 2007.Capital + Merchant were placed
into liquidation under the control of the Official Assignee
in December 2009. Crimes Act
offencesSection 220: Theft by person in
special relationship(1) This section applies to
any person who has received or is in possession of, or has
control over, any property on terms or in circumstances that
the person knows require the person—(a) to account to
any other person for the property, or for any proceeds
arising from the property; or(b) to deal with the
property, or any proceeds arising from the property, in
accordance with the requirements of any other person.(2)
Every one to whom subsection (1) applies commits theft who
intentionally fails to account to the other person as so
required or intentionally deals with the property, or any
proceeds of the property, otherwise than in accordance with
those requirements.(3) This section applies whether or
not the person was required to deliver over the identical
property received or in the person's possession or
control.(4) For the purposes of subsection (1), it is a
question of law whether the circumstances required any
person to account or to act in accordance with any
requirements.Section 242: False statement by
promoter, etc(1) Every one is liable to
imprisonment for a term not exceeding 10 years who, in
respect of any body, whether incorporated or unincorporated
and whether formed or intended to be formed, makes or
concurs in making or publishes any false statement, whether
in any prospectus, account, or otherwise, with
intent—(a) to induce any person, whether ascertained
or not, to subscribe to any security within the meaning of
the Securities Act 1978; or(b) to
deceive or cause loss to any person, whether ascertained or
not; or(c) to induce any person, whether ascertained or
not, to entrust or advance any property to any other
person.(2) In this section, false statement means
any statement in respect of which the person making or
publishing the statement—(a) knows the statement is
false in a material particular; or(b) is reckless as to
the whether the statement is false in a material
particular.Role of the SFOThe
Serious Fraud Office (SFO) was established in 1990 under the
Serious Fraud Office Act in response to the collapse of
financial markets in New Zealand at that time.The SFO
operates three investigative teams:• Fraud
Detection & Intelligence;• Financial Markets
& Corporate Fraud; and• Fraud &
Corruption.

The SFO operates under two sets of
investigative powers

Part I of the SFO Act provides
that it may act where the Director “has reason to suspect
that an investigation into the affairs of any person may
disclose serious or complex fraud.”

Part II of the
SFO Act provides the SFO with more extensive powers where:
“…the Director has reasonable grounds to believe that an
offence involving serious or complex fraud may have been
committed…”

The SFO’s Annual Report 2011 sets out
its achievements for the past year, while the Statement of
Intent 2012-2015 sets out the SFO’s three year strategic
goals and performance standards. Both are available online
at: www.sfo.govt.nzAppendix:
Hub trialCount
#ChargeDefendantsTransactionGuilty/Not
Guilty1 S220

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